Risk can be understood as the possibility of loss or danger. The finance department of a company tries to prepare such a capital structure that attracts ess risk and cost, as well as the existing management control, is diluted at the minimum level. There are two kinds of risk, as per risk principle, namely, Business Risk and Financial Risk. The former is the risk related to the business of the entity while the latter is the risk due to the use of debt funds. Risk is inherent in every … [Read more...]

Time Value of Money says that the worth of a unit of money is going to be changed in future. Put simply, the value of one rupee today will be decreased in future. The whole concept is about the present value and future value of money. There are two methods used for ascertaining the worth of money at different points of time, namely, compounding and discounting. Compounding method is used to know the future value of present money. Conversely, discounting is a way to compute the present value of … [Read more...]

When a person borrows money from the money lender or any bank/financial institution, some extra amount is charged by the lending entity for the use of money, called as interest. The interest rate is mutually decided by both the parties. Interest can be charged in two ways, i.e. simple interest and compound interest. The former is the type of interest where the interest is charged only on loaned amount but in the case of the latter interest is calculated on the amount lent plus accumulated … [Read more...]

One of the universally accepted fact is, money has time value, i.e. one rupee has higher value today, than one year later. Time value of money is helpful in determining the value of financial assets. There are two techniques used in this context, i.e. annuity and perpetuity. Annuity, may be defined as the a series of cash flows, usually of fixed amount, paid/received at regular intervals. The interval can be annually, semi-annually or tri-monthly, monthy etc. Perpetuity, on the other hand, is … [Read more...]

The material is an integral part of the production cost, as it is composed of 80% of the total product cost. So every manufacturing concern keeps a track of its inventory purchased, returned and issued during the year, through the inventory record system. The inventory system is of two types: Perpetual Inventory System, in which the movement of the stock is recorded continuously and Periodic Inventory System, which updates the inventory records from time to time only after the physical count of … [Read more...]

Both Standard Costing and Budgetary Control are based on the principle that costs can be controlled along certain lines of supervision and responsibility, that focuses on controlling cost by comparing actual performance with the predefined parameter. However, the two systems are neither similar nor interdependent. Standard Costing delineates the variances between actual cost and the standard cost, along with the reasons. On the contrary, Budgetary Control, as the name suggest, refers to the … [Read more...]

The budget can be understood as a quantitative plan that acts as an estimate of future operation. Based on the Capacity, there are two types of budgets prepared in cost accounting, namely, fixed budget and flexible budget. Fixed Budget is a budget that remains constant, irrespective of the levels of activity, i.e. the budget is created for a standard volume of production. On the contrary, Flexible Budget can be understood as the budget created for different production levels or capacity … [Read more...]

There are various cost accounting techniques used to measure the cost of the product. When the goods are produced only against special orders, job costing is used by firms. On the other hand, when a product passes through several processes or stages, the output of one process becomes the input of next process, and to determine the cost of each process, process costing method is applied. It is generally used when like units are to be manufactured, that too in a continuous flow. In other words, … [Read more...]

In simple terms, the amount paid for the use of borrowed funds is known as interest. It is the money that is paid at short intervals at a specified rate for the money lent or for postponing the repayment of the financial obligation. It should not be confused with the dividend, which is the amount which a company pays to its shareholders out of its profit. Perhaps, the interest and dividend can be payable or receivable depending upon whether the company owns or owes money. When the funds are … [Read more...]

There are two alternative approaches for the valuation of inventory; they are Marginal Costing and Absorption Costing. In marginal costing, marginal cost is determined by bifurcating fixed cost and variable cost. Only variable costs are charged to operation, whereas the fixed cost are excluded from it and are charged to profit and loss account for the period. Converselty, Absorption costing or otherwise known as full costing, is a costing technique in which all costs, whether fixed or … [Read more...]